Stock Traders Are Playing Jenga With the Market

How much longer can the sum keep rising if the parts aren’t participating?

While the key market indexes continue their march to new multiyear highs, the number of individual stocks on the NYSE doing the same has declined. That’s a worrisome sign for the market, as participation in a rally is like market liquidity: The fewer stocks that follow the indexes’s lead, the less support there is for further gains.

The S&P 500 rose in intraday trading Wednesday to the highest level since Nov. 1, 2007, but that’s nothing new. The index has now reached a new multiyear intraday high in 13 of the 19 sessions since Jan. 17.

On Tuesday, the Dow Jones Industrial Average reached the highest intraday level it has seen since Oct. 15, 2007, marking the ninth time in the 13 sessions since Jan. 22 the average has hit a new high.

Meanwhile, the number of NYSE stocks reaching new 52-week highs peaked at 694 on Jan. 14, and was down to 359 on Jan. 17, when the S&P 500 hit its high, according to data provided by FactSet Research.

As of midday trading Wednesday, just 283 NYSE stocks had hit new 52-week highs.

Through Tuesday, just 12 of 30 Dow components had made new 52-week highs since the Dow first reached one on Jan. 22.

General Electric Co. made it 13 on Wednesday after it agreed to sell its 49% stake in NBCUniversal to Comcast Corp.for $16.7 billion. GE was last up 3.4%, at $23.35, and on track to close at the highest level seen since Oct. 1, 2008.

New highs are like wood blocks in a game of Jenga. When the number of highs starts declining while indexes keep rising, it’s like taking wood blocks from the bottom of the Jenga tower and placing them on top. The tower won’t necessarily crumble right away, but the structure becomes less and less stable.

New NYSE highs peaked at a 21-month high of 475 on Sept. 14, 2012. When the Dow reached its 2012 peak on Oct. 5, just 291 NYSE stocks hit new highs.

Viewed differently, new NYSE highs hit a four-month peak of 369 on April 1, 2011, before pulling back to 345 on April 29. Meanwhile, the Dow traded above 12400 intraday on April 1 for the first time since June 2008 and rose to an even higher high of 13832.83 on April 29.

That divergence — a decline in NYSE new highs while the Dow rose — proved prescient over the short term, as the Dow fell 6.4% over the following six weeks.

Perhaps the market is starting to get the message of its parts. The Dow was down 42 at 13977 in midday trading Wednesday, after being up 11 points at its intraday high of 14029.35, which was below Tuesday’s high of 14038.97. The S&P 500 was up less than 0.1% at 1520 in midday trading Wednesday, off its earlier multiyear high of 1524.70.

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